Twenty years ago, Western Europe was going through a crisis of confidence. While the United States was landing men on the moon, many Europeans feared they had missed out on the new frontiers of aerospace and were destined to a future producing nothing more technologically sophisticated than wine, cheese and perfume.
European governments jumped in to reverse their potential technological backwardness. West Germany, France, Britain and Spain created Airbus Industrie, a consortium designed to catapult Europe into the commercial aviation business that the United States had dominated since World War II. For the Europeans of the 1970s, aerospace became a bedrock industry that would both foster technological growth and create high-paying jobs.
Thanks to $13.5 billion in government funding, Airbus has emerged over the past two decades as a giant-sized competitor to Boeing Co., the world's leading supplier of commercial aircraft, and one that threatens the stability of the United States's other producer, McDonnell Douglas Corp.
In the process, Europe's heavy subsidies to Airbus have spawned a seemingly intractable, five-year transatlantic trade dispute, with the United States arguing that government support gives Airbus an unfair advantage over American companies that have to raise money in commercial capital markets.
If interest is included, a U.S.-financed study shows, the value of the subsidies is $25.9 billion -- nearly twice as large as the original investment of $13.5 billion. Airbus, further, has never made a profit on the sale of its planes, and a U.S. analysis showed that no Airbus product would be viable in a commercial environment in which it had to earn an 8 percent return on investment.
A New Round of Talks The Bush administration has threatened to file an unfair trade complaint against the European members of the Airbus consortium if an agreement on limiting the subsidies is not reached by Sept. 30. The next round of talks is likely to be held next week.
Commerce Undersecretary J. Michael Farren said continued European government subsidies to Airbus hold "long-term dire consequences" for the U.S. aerospace industry and its workers that "will not be clearly obvious until it is too late to reverse some of the negative consequences."
A study done for the Commerce Department this month by Gellman Research Associates Inc., a suburban Philadelphia specialist in air transport issues, concluded that U.S. companies will continue to lose market share and profits to Airbus. Echoing the reasons that Europe gave for starting Airbus 20 years ago, the study said the greatest harm to the U.S. economy will come from "the loss of significant, beneficial spillover effects for sectors other than aviation," especially other high-technology industries that contribute to the building of a modern jet aircraft.
As a result of government funding, the study showed that Airbus's share of commercial aircraft orders has almost quadrupled in the past decade, from 7 percent in 1980 to 27 percent last year -- close to the consortium target of gaining a 30 percent market share by the mid- 1990s. At the same time, the market share of U.S. manufacturers has declined from 87 percent in 1980 to 64 percent last year.
For Europeans, those gains validate their Airbus policy. Without government support, Airbus officials said, "the world would be faced with a U.S. monopoly" in commercial aircraft sales.
Furthermore, the Europeans insist that U.S. government contracts to design and build military aircraft give American companies backdoor subsidies that Henri Martre, the head of the French aerospace industry organization, said 10 days ago are three times greater than the amount the four consortium members contributed to Airbus.
Behind the rhetoric from both sides, however, lie basic philosophic differences on the proper relationship between national governments and their industries that make this trade dispute more intractable than most.
The United States sees its aerospace industry in commercial terms: companies fighting to sell high quality planes around the world that are threatened by the deep pockets of European governments. To Europe, the issue is the political and economic viability of the continent.
"We see this as a European venture. There is a strong tradition in European countries for this kind of mixture of state and commerce. This is what the Airbus represents," said Peter Doyle, spokesman in Washington for the 12-nation European Community that is negotiating the trade dispute for Airbus consortium members.
"There's nothing different here from normal European business practices," Doyle continued. "Look at airlines. Most of them are state-owned. It's just a matter of two different philosophies."
Retorted a senior U.S. aerospace industry executive: "From the perspective of the U.S. industry, the philosophical difference shows up in Airbus's ability to price lower than we can price.
"Aerospace today is what the steel industry and auto industry were 20 years ago. No nation feels modern without one. The Europeans have basically said that no modern society is truly modern without an aerospace industry and they appear willing to pay the cost, whatever it takes," the executive said.
The Bush administration doesn't want to see the fate of the U.S. steel and auto industries befall the commercial aviation industry, which remains a world leader for innovative design and high quality.
Commerce Secretary Robert A. Mosbacher called the aerospace industry "among our most competitive, generating a $12 billion positive trade balance in 1989."
Farren also raises fears that the success of the Airbus program will encourage a newly united Europe to form similar heavily subsidized groups in other areas.
Recognizing the differences in philosophy between the United States and its European allies, the Bush administration has backed down from past demands that Airbus be put on a strict commercial footing and that all past loans be paid back.
Instead, U.S. trade negotiators said, the administration is willing to settle for an end to all future subsidies on the production of planes and sharp limits on the amount governments could contribute to the development of new models.
A U.S. negotiator called this "less than ideal," but added, "We may have to accept what has been done, but we don't want any further sweeteners."
How Low a Subsidy? The Europeans now seem willing to give up production subsidies, and they have proposed dropping the subsidies for development from as much as 80 percent of costs to about 45 percent. The United States wants that subsidy to go down even more, to 25 percent.
The Europeans also want to be able to use government funds to bail out unsuccessful projects. U.S. negotiators said they are willing to accept that, providing the Europeans attach the same strict payback conditions to any Airbus bailout that the United States did with its federal bailouts of New York City, Chrysler Corp. and Lockheed Corp.
"Now is the time they ought to be able to exist on their own on a commercial basis," said Boeing senior vice president Larry Clarkson.
"The time is past" when American firms held a monopoly on the production of commercial aircraft, he said.
The Europeans "are now by their own admission out in the market with a complete product line of competing aircraft. So they ought to operate as a commercial entity with the same responsibilities as any commercial entity," said Clarkson.